World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Friday, December 11, 2009

Equity futures were pushed higher last night, once again returning to near the top of its range where resistance is found. Below is the overnight action in the DOW and S&P futures:

The dollar wandered higher, then lower, and now higher again, back above the 76 level. This is a disconnect from equities as the last few times the dollar was at this level, stocks were lower. The long bond continued lower after clearly breaking down yesterday on the last and worst performing 30 year bond auction of 2009. This is a clear break, charts later. Oil is up slightly overnight, gold was up quite a bit but has returned closer to where it closed yesterday.

Retail sales for November came out higher than expected. These are month over month numbers and November’s increase was less than October’s yet Econoday calls it a spike at 1.3%. It did turn positive year over year and thus means that sales are not deteriorating below last year’s disasterous levels for now. Keep in mind that other indicators I follow, such as Tax receipts, have not risen, credit transactions are still falling in the background:

HighlightsThe consumer decided to come off the sidelines and jump back into the economy, boosting November retail sales-and beyond just autos and gasoline. Overall retail sales in November posted a 1.3 percent spike after a revised 1.4 percent gain in October. November's increase was well above the consensus estimate for a 0.9 percent increase. Excluding autos, sales gained 1.2 percent in the latest month after no change in October. The market consensus had expected a 0.5 percent gain in ex autos. Even excluding both autos and gasoline, November sales were up a healthy 0.6 percent, following a 0.1 percent uptick the month before.

The November increase in overall sales was led by a 6.0 percent jump in gasoline sales with notable strength also seen in electronics & appliance stores, up 2.8 percent, and in auto dealers, up 2.0 percent. Also rising were building materials & garden equipment, food & beverage stores, health & personal care, sporting goods & hobby stores, general merchandise, nonstore retailers, and food services & drinking places.

Overall retail sales on a year-ago basis in November improved to up 1.9 percent, from down 2.0 percent in October. Excluding motor vehicles, the year-on-year rate increased to up 1.3 percent in November from down 2.8 percent the previous month.

Today's release indicates the consumer has more strength than previously believed. The remaining question is whether consumers can continue the pace through December. The strong November sales numbers will add to estimates for fourth quarter GDP growth.

Import and Export prices strengthened in November, mainly on the back of a falling dollar. As Econoday points out, the dollar has now turned up – so, it’s become perfectly obvious that the only way they can generate positive numbers is to destroy the currency, not what I’d call a picture of health, let’s see what happens when the dollar strengthens:

HighlightsThe dollar's steep drop in November drove prices for imported goods sharply higher. Import prices rose 1.7 percent vs. a steep 0.8 percent gain in October and a 1.5 percent gain back in August. It was back in July that the dollar began a steep descent, down 6 percent on the dollar index out to the end of November. Import inflation swept across November's non-finished goods: industrial supplies up 4.8 percent compared to October, fuels & lubricants up 7.3 percent, crude up 5.0 percent, foods & feeds up 0.5 percent. Excluding petroleum, prices rose 0.7 in November vs. a 0.6 percent rise in October. Excluding all fuels, and in this case a 30.0 percent spike in what are still depressed natural gas prices, import prices rose 0.4 percent to extend a building four-month trend of palpable increases.

What isn't increasing yet are prices for imported finished goods. Capital goods imports did rise 0.2 percent in the month, which is a comparatively strong rise for the category and double the 0.1 percent increase in October, but the gain is offset by a 0.1 percent decline in prices of imported consumer goods. Several months of price inflation for inputs have yet to appear in outputs.

Export prices also show significant pressure, up 0.8 percent in the month. The gain reflects month-to-month pressure across most input components with an outsized 0.3 percent rise for capital goods and a large 0.2 percent rise for consumer goods. Here the gains hint at pricing power for U.S. exporters who, because of the weak dollar, are perhaps raising their dollar prices a bit for their foreign customers.

But the scene is changing for December as the dollar has taken a turn higher, up 2 percent so far this month. The gain in the dollar will limit foreign demand for U.S. goods. Nevertheless, today's report points to trouble for Tuesday's producer price report for November.

Consumer sentiment comes out at 9:55 Eastern time.

Reader, Joe, posted some very telling revenue figures for the state of California yesterday:

Compared to this date in November 2008, revenues were down $2.33 billion (-7.4%). This was primarily driven by personal income taxes, which came in $2.63 billion below (-15.8%) last year’s figures, and corporate taxes, which were $293 million under (-11.8%) the same point in 2008.

The State started the fiscal year with an $11.9 billion cash deficit in the General Fund, which grew to $24.4 billion by November 30. Those deficits are being covered with a combination of $15.6 billion of internal borrowing from special funds and $8.8 billion in short-term revenue anticipation notes.

Total and complete disaster. Note the use of accounting gimmicks. This actually only works to worsen the situation for there will come a day very shortly where such gimmicks will no longer work.

The dollar, by the way, is spiking as I type... Watch out equities, this is very interesting as the long bond is still falling. This is not a good condition, to say the least. After yesterday’s bad 30 year auction, prices broke below key support. Below is a 9 month chart of USB, the 30 year bond fund. That large flag, now broken, has a downside target that is substantially lower, meaning substantially higher interest rates:

Here is the Point & Figure diagram, you can see that it has a target of 94, that’s a long way down:

USB:

To those who think higher rates in this condition are good, I have a news flash for you… it’s not good when your entire society is saturated with debt and your government and everyone else is borrowing short. If you look at the history of the Great Depression, there was the initial stock market collapse in 1929, there was a 50% retrace, and just about this time in the sequence of events the bond market began to collapse. No, it wasn’t an earth shattering collapse, most historians don’t even acknowledge it. But to their then society that was full of debt, it brought about harder times and thus was born their ‘C’ leg down, a drawn out grinding affair that bankrupted thousands of companies, millions of individuals. Guess what? Our inflation adjusted per capita debt is over TWICE what theirs was. It’s interesting to me that this break in bonds occurred exactly on our spiral Fibonacci date that emanated from this exact same era that I’m discussing. Pay attention here to the sequence of events that follow.

By the way, many “events” that receive a lot of attention in the media are simply SYMPTOMS of this debt problem. Take the “Dust Bowl” of the Great Depression era, for example. The drying up of credit preceded the drying up and availability of water and farmers were left helpless as they watched their fields literally blow away.

Below is the P&F chart for gold, new target is $1,010:

Below is the P&F for oil, target is $65:

This action looks very unstable again this morning, the dollar is headed straight up, currently at 76.43… Short term stochastics are overbought, this could get interesting.